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Emerging Markets : Quest For Investment Grade Gathers Pace

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Some 50% of respondents to a Merrill Lynch emerging market investor survey in August said they were bullish on Brazil. Reaching a similar conclusion, rival Morgan Stanley predicts Brazilian markets will see further upside, despite recent US market turbulence, and expects the country’s GDP to grow by 4.5% in both 2007 and 2008. Morgan Stanley predicts inflation will fall below the 4.5% official target, ending 2007 at between 3% and 4%, but warns that a weakening currency could bring the rate to a higher 4% to 5%.

The continuing improvements in Brazil’s economy are reflected in the country’s credit ratings. In August Moody’s upgraded Brazil’s foreign and local debt ratings to Ba1 from Ba2, just one notch below investment grade. Standard & Poor’s and Fitch upgraded Brazil's sovereign ratings earlier this year. Moody’s also raised the country ceiling to Baa3, allowing local companies to achieve investment-grade ratings. Several Brazilian companies already hold investment-grade ratings, including the CVRD mining giant, state-controlled oil company Petrobras and beverage producer AmBev.

“As confidence in the economy rises, investors, credit-raters, analysts and policymakers say that Brazil could reach investment-grade status by 2009,” says a report by consulting firm McKinsey & Company. “That achievement would give local companies far better access to international capital markets.” The move, the report says, would bring Brazilian local-currency markets in line with developed financial markets in costs, terms and maturities.

International investors are also showing continuing confidence in Brazil. Itaú Securities expects to raise as much as $250 million by end-2008 through an equities fund established for Korean investors. Known as the Brazil Samba Fund, it will be run through a joint venture between Itaú Securities as manager, Daewoo Securities and the Korea Development Bank. Itaú aims to raise some $50 million for the fund through year-end. The Brazilian financial institution is reportedly arranging a similar fund for Japanese investors.